UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Quarterly Period Ended
November 20, 1999
Commission File Number 0-18275
ITEX CORPORATION
(Exact Name of Registrant as Specified in its Charter)
Nevada 93-0922994
-------------------------------- --------------------------------
State (or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
3400 Cottage Way, Sacramento, California 95825
------------------------------------------------------------------
(Address of principal executive offices including zip code)
916-679-1111
----------------------------------
(Registrant's telephone number including area code)
Indicate by check whether the Registrant: (1) filed all reports required to be
filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes _______ No ____X____
Number of shares of common stock, $0.01 par value outstanding at
June 8, 2000: 14,336,406
(This Form 10-Q includes 14 pages)
ITEX CORPORATION
FORM 10-Q
For The Quarterly Period Ended November 20, 1999
INDEX
Page
------
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS AT NOVEMBER 20, 1999 AND
JULY 31, 1999 3
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE SIXTEEN
WEEK PERIODS ENDED NOVEMBER 20, 1999 AND 1998 4
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIXTEEN
WEEK PERIODS ENDED NOVEMBER 20, 1999 AND 1998 5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 8
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 11
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 14
ITEX CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
November 20, July 31,
1999 1999
-------- --------
ASSETS
Current assets:
Cash and cash equivalents ......................... $ 373 $ 203
Accounts receivable, net of allowance
for doubtful accounts of $479 and $697 ........... 1,071 1,143
Notes receivable .................................. 9 9
Prepaids and other current assets ................. 198 219
-------- --------
Total current assets .......................... 1,651 1,574
Property and equipment, net of accumulated
depreciation of $762 and $635 .................... 569 523
Goodwill and purchased member lists, net ............... 3,764 3,866
Note receivable from sale of Investment
in Samana Resort ....................................... 400 518
Other assets ........................................... 136 148
-------- --------
Total assets ....................................... $ 6,520 $ 6,629
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank line of credit ............................... $ 50 $ 200
Long-term debt and capital
lease obligations, current portion ............... 1,151 1,189
Accounts payable .................................. 438 675
Accounts payable to brokers ....................... 1,132 1,167
Deferred revenue .................................. 466 586
Notes payable to related parties .................. 480 480
Other current liabilities ......................... 1,749 1,949
-------- --------
Total current liabilities ..................... 5,466 6,246
-------- --------
Long-term debt and capital lease obligations ........... 277 209
-------- --------
Commitments and contingencies .......................... -- --
Stockholders' equity:
Common stock, $.01 par value; 50,000
shares authorized; 13,729 and 11,408
shares issued and outstanding ................. 138 118
Additional paid-in capital ....................... 27,380 27,130
Treasury stock, at cost (2 shares in
1999 and 1998) .................................. (10) (10)
Accumulated deficit .............................. (26,731) (27,064)
-------- --------
Total stockholders' equity ...................... 777 174
-------- --------
Total liabilities and stockholders' equity .... $ 6,520 $ 6,629
======== ========
The accompanying notes are an integral part of the
consolidated financial statements.
- 3 -
ITEX CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
Sixteen Weeks Ended
November 20,
----------------------
1999 1998
-------- --------
Revenue:
Trade exchange revenue ....................... $ 4,679 $ 4,607
-------- --------
4,679 4,607
-------- --------
Costs and expenses:
Costs of trade exchange revenue .............. 2,418 2,958
Selling, general and administrative .......... 1,632 1,874
Costs and expenses of discontinued operations 49 623
Costs of regulatory and litigation matters .. 76 760
Depreciation and amortization ................ 179 581
-------- --------
4,354 6,796
-------- --------
Income (loss) from operations .................... 325 (2,189)
-------- --------
Other income (expense):
Interest income (expense), net ................. (92) (43)
Miscellaneous, net ............................. 100 47
-------- --------
8 4
-------- --------
Income (loss) before income taxes ................ 333 (2,185)
Provision for income taxes ....................... -- 5
-------- --------
Net income (loss) ................................ $ 333 $ (2,190)
======== ========
Average common and equivalent shares ............. 12,324 11,585
======== ========
Net income (loss) per common share ............... $ 0.03 $ (0.19)
======== ========
The accompanying notes are an integral part of the
consolidated financial statements.
- 4 -
ITEX CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Sixteen Weeks Ended
November 20,
-----------------------
1999 1998
--------- ---------
Cash flows from operating activities:
Net income (loss) ................................. $ 333 $(2,190)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Depreciation and amortization .................. 504 581
Gain on sale of magazine rights ................ (100)
Charge to reserve for BXI sale ................. (382) --
Stock and options issued for goods and services -- 743
Changes in operating assets and liabilities:
Accounts and notes receivable ................ 72 506
Prepaids and other current assets ............ 70 (150)
Accounts payable and other current liabilities (437) 142
Accounts payable to brokers .................. 135 (315)
Deferred revenue ............................. (120) (86)
------- -------
Net cash provided by (used in)
operating activities ..................... 75 (769)
------- -------
Cash flows from investing activities:
Proceeds from initial payment on sale of Samana .. 118 --
Proceeds from sale of magazine rights ............ 100
Equipment, information systems and other ......... (3) (130)
------- -------
Net cash provided by (utilized in)
investing activities ..................... 215 (130)
------- -------
Cash flows from financing activities:
Proceeds from sales of stock ...................... -- 10
Proceeds from bank borrowings .................... -- 42
Proceeds from third party indebtedness ........... -- 1,140
Repayments of bank line of credit ................ (150) --
Borrowings (repayments) of third party
indebtedness .................................... 30 (89)
------- -------
Net cash provided by (used in)
financing activities ....................... (120) 1,103
------- -------
Net increase (decrease) in cash
and cash equivalents ................................. 170 204
Cash and cash equivalents at beginning of period ...... 203 936
------- -------
Cash and cash equivalents at end of period ............ $ 373 $ 1,140
======= =======
Supplemental cash flow information:
Cash paid for interest ............................. $ 21 $ 9
Cash paid for income taxes ......................... -- 5
Supplemental noncash investing and financing activities:
The Company issued common stock in exchange for
the stock of the corporation that had previously
operated the independent ITEX brokerage office in
Sacramento, California in a pooling-of-interests. 270 --
The accompanying notes are an integral part of the consolidated
financial statements.
- 5 -
ITEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
NOTE 1 - UNAUDITED INTERIM INFORMATION
ITEX Corporation (the "Company" or "ITEX") and its wholly-owned subsidiaries
prepare and report financial results using a fiscal year ending July 31. The
Company closes its books of account at the end of each of 13 four-week
"accounting cycles". The Company reports financial position and results of
operations and cash flows using one quarter containing four four-week accounting
cycles and three quarters containing three four-week accounting cycles.
Accordingly, the dates for the fiscal ends of the Company's quarters for public
reporting are as follows: first quarter, November 20; second quarter, February
12; third quarter, May 7; fourth quarter (fiscal year-end), July 31.
This Form 10-Q includes the consolidated financial statements of the Company and
its wholly-owned subsidiaries. The consolidated balance sheet as of July 31,
1999 is excerpted from the Company's audited financial statements for the fiscal
year then ended. The Company's consolidated financial statements included in
this Form 10-Q for the interim periods ended November 20, 1999 and 1998 include
all normal recurring adjustments which, in the opinion of the Company, are
necessary for a fair statement of the results of operations, financial position,
and cash flows as of the dates and for the periods presented. The Company's
operating results for the sixteen-week period ended November 20, 1999 are not
necessarily indicative of the results that may be expected for the fiscal year
ending July 31, 2000.
The Notes to Consolidated Financial Statements included in the Company's July
31, 1999 Annual Report on Form 10-K should be read in conjunction with these
consolidated financial statements.
NOTE 2 - BUSINESS COMBINATION
In October 1999, the Company (the "issuing company") exchanged 1,967 shares
of the Company's restricted common stock for all of the outstanding stock of
California Trade Exchange, Inc. (the "combining company"), a California
corporation, which operated the business of the Company's largest independent
broker located in Sacramento, California. The Company is required to account for
the business combination as a pooling-of-interests. Under this method, the stock
issued by the issuing company and the net assets of the combining company are
recorded at the historical net book values of the net assets of the combining
company, instead of at their fair market values as under the purchase method of
accounting for business combinations. No amounts are assigned to identifiable
intangible assets or goodwill.
The net book value of the net assets in the historical financial statements of
the combining company was approximately $270, consisted primarily of accounts
receivable and office furniture and equipment. The pooling-of-interests method
requires restatement of prior financial statements to reflect financial position
and results of operations and cash flows as if the issuing and combining
companies had always been combined. The Company has not restated its financial
statements for this business combination because the effects of restatement
would be immaterial. The business combination had no effect on revenue for the
16-week period ended November 20, 1999, but since the Sacramento business is now
owned and operated by the Company, the Company no longer pays broker commissions
with respect to the Company's revenue from the Sacramento location. Instead, the
Company now pays the operating costs of the business.
- 6 -
The principal owner of the Sacramento brokerage business became President, Chief
Executive Officer and a Director of ITEX Corporation and a minority owner of the
Sacramento brokerage business served as a vice president of the Company in
charge of broker training until March 7, 2000.
NOTE 3 - WADE COOK SETTLEMENT
In August 1999, a settlement agreement was reached between the Company and Wade
Cook Financial Corporation ("WCFC") related to WCFC's refusal to permit
transfer, without restricted legend, of WCFC stock issued to a Company
subsidiary in exchange for a media due bill. Under the settlement agreement,
WCFC agreed that the Company subsidiary was the owner of 1,400 shares of WCFC
unrestricted stock which may be sold by ITEX at no more than 100 shares a month,
at current market prices, subject to a right of first refusal by WCFC. The
settlement agreement also provides for the transfer of 300 ITEX trade dollars to
WCFC, which was accomplished. Through April 28, 2000, the Company has sold
approximately 451 shares of the Wade Cook stock, from which it realized net
proceeds of approximately $176.
Note 4 - SALES OF ASSETS
Samana. During the 16-week period ended November 20, 1999, the Company sold its
investment in the Samana resort property to the parties from whom the Company
had originally purchased the property for $550. The property was previously
written down in fiscal 1999 to $518, based on the selling price less related
costs of $32. During the 16-week period ended November 20, 1999, the purchasers
paid $150. Subsequent to November 20, 1999, the purchasers made an additional
payment of $50. The remaining balance due of $350 has not been paid in
accordance with the terms of the sale and the Company is contemplating legal
action to enforce the terms of the sale agreement. The Company believes that it
will recover the unpaid balance of $350 either from the current debtors or from
resale of the property to another party.
Magazine Publishing Rights. During the 16-week period ended November 20, 1999,
the Company sold the rights to publish its magazine related to the commercial
barter industry for $100, which was received in cash. There were no assets
associated with the magazine carried on the Company's books and, therefore, the
gain of $100 has been included in other income.
NOTE 5 - RESERVE FOR LOSS ON BXI DISPOSAL
During the 16-week period ended November 20, 1999, the net loss for BXI of $382
(after amortization of customer lists and goodwill) was charged against the
reserve of $2,000 that was established during fiscal 1999. The remaining amount
of the reserve of $1,618 is included in the balance sheet at November 20, 1999
as a reduction of goodwill and purchased member lists.
- 7 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (in thousands, except per share amounts)
Overview
ITEX Corporation and subsidiaries ("ITEX" or the "Company") operates the ITEX
Retail Trade Exchange and acts as third-party recordkeeper for transactions
between members of the exchange. The Company charges association fees for each
of 13 four-week accounting cycles each year, as well as commissions on
transactions. ITEX also receives fees paid in ITEX trade dollars, which the
Company uses to pay a portion of its own operating expenses and to provide
merchandise for sale for trade dollars to trade exchange members.
The BXI trade exchange was acquired by the Company on June 25, 1998. The BXI
trade exchange operations are included in the financial statements for the
16-week periods ended November 20, 1999 and 1998. On January 18, 2000 the net
assets and business of BXI Corporation were sold to TAHO Enterprises, Inc., a
Massachusetts corporation, for $4,000 cash.
Additionally, in recent years the Company has engaged in the operation of
several new businesses outside its core business of operating trade exchanges.
These new businesses have not been profitable and commencing in March 1999 the
Company began the process of discontinuing these businesses and, where possible,
liquidating them. It is the intent of the Company not to engage in business
activities or ventures that are not related to the Company's core business of
operating the ITEX Retail Trade Exchange. Prior to the 16-week period ended
November 20, 1999, the Company incurred operating losses from its trade exchange
operations. Such losses were increased by costs associated with the discontinued
operations discussed above and costs and expenses of regulatory and litigation
matters connected with disputes about the acquisition of the BXI trade exchange,
an SEC investigation, and other legal and regulatory matters.
Results of Operations
The following table sets forth, for the periods indicated, selected consolidated
financial information of the Company, with amounts also expressed as a
percentage of net revenues:
Sixteen Week Periods Ended November 20,
--------------------------------------------------
1999 1998
----------------------- ------------------------
Amount Pct* Amount Pct*
--------- ---------- --------- -----------
Revenue:
Trade exchange:
Association fees ............. $ 1,278 27% $ 1,240 27%
Transaction fees ............. 3,401 73% 3,367 73%
------- ------- ------- -------
4,679 100% 4,607 100%
------- ------- ------- -------
Costs and expenses:
Trade exchange ................. 2,418 52% 2,958 64%
Selling, general, administrative 1,632 35% 1,874 41%
Discontinued operations ........ 49 1% 623 14%
Regulatory and litigation ...... 76 2% 760 16%
Depreciation and amortization .. 179 3% 581 14%
------- ------- ------- -------
4,354 93% 6,796 148%
------- ------- ------- -------
Income (loss) from operations .. 325 7% (2,189) (48%)
Other income (expense) ......... 8 -- 4 --
------- ------- ------- -------
Income (loss) before taxes ..... 333 7% (2,185) (48%)
Tax provision .................. -- -- 5 --
------- ------- ------- -------
Net income (loss) .............. $ 333 7% $(2,190) (48%)
======= ======= ======= =======
- ---------------------------------
* Percent of Total Revenue
- ---------------------------------
- 8 -
Trade exchange revenue and costs
Total trade exchange revenue increased slightly to $4,679 in the first quarter
of fiscal 2000 ("fiscal 2000") as compared to $4,607 in the first quarter of
fiscal 1999 ("fiscal 1999"). Revenue of the ITEX Retail Trade Exchange (the
"ITEX Exchange") increased to 10% to $2,832 in fiscal 2000 from $2,565 in fiscal
1999. Revenue from the BXI trade exchange decreased to $1,847 in fiscal 2000
from $2,042 in fiscal 1999. BXI Corporation was sold by the Company on January
18, 2000.
Association fee revenue for the ITEX Exchange increased slightly to $864 in
fiscal 2000 from $826 in fiscal 1999. This resulted from a slight decrease in
the average number of members that was more than offset by an increase in the
monthly cash association fee from $15 per cycle to $20 per cycle, which took
effect for November 1999. Future revenue from association fees is expected to
increase as a result of this higher cash fee structure. Transaction fees for the
ITEX Exchange increased to $1,968 in fiscal 2000 from $1,739 in fiscal 1999 due
to an increased average volume of trading per member. Total quarterly average
revenue per member increased in fiscal 2000 to $213 (not in thousands) from $186
(not in thousands) in fiscal 1999.
Costs of trade exchange revenue decreased substantially in fiscal 2000 primarily
as a result of the Company assuming the operations of two significant volume
brokerages, after which commissions were not paid to brokers. The Sacramento
brokerage was merged into the Company on October 20, 1999 in a business
combination required to be accounted for as a pooling-of-interests. The Company
terminated a broker in New York City and opened its own office to service the
existing client base. Lower levels of broker commissions are expected in the
future, with some increases in selling, general and administrative expenses as
a result of the Company assuming the facilities, personnel and other costs of
these two brokerages. In February 2000, the Company continued in this direction
with the acquisition of the Seattle, Washington and Houston, Texas brokerage
offices.
Selling, general and administrative expenses
Selling, general and administrative expenses decreased to $1,632 in fiscal 2000
from $1,874 in fiscal 1999. In 2000, the effects of increased facilities,
personnel, and other costs of the New York and Sacramento operations by the
Company were more than offset by several factors. This included reduced
personnel levels in various departments at the Company's headquarters, ceasing
production and publishing the Company's barter industry magazine (alt.finance),
eliminating unnecessary expenses and achieving the success from increased
efforts to reduce cash expenditures by obtaining various goods and services used
by the Company in its operations by paying with ITEX Trade Dollars.
Costs and expenses of discontinued operations
During fiscal 2000 and fiscal 1999, the Company incurred costs and expenses of
$49 and $623, respectively, in connection with activities that have been
discontinued. These are described in the Company's Annual Report on Form 10-K
for the fiscal year ended July 31, 1999.
Costs and expenses of regulatory and litigation matters
During fiscal 2000 and fiscal 1999, the Company incurred costs and expenses of
$49 and $623, respectively, in connection with regulatory and litigation
matters. These are described in the Company's Annual Report on Form 10-K for the
fiscal year ended July 31, 1999.
- 9 -
Depreciation and amortization
Depreciation and amortization decreased to $179 in fiscal 2000 from $581 in
fiscal 1999 primarily as a result of a charge of $382 against a reserve of
$2,000 that was established in the year ended July 31, 1999 for the estimated
loss on the disposal of BXI Corporation, which was completed on January 18,
2000.
Liquidity and Capital Resources
At November 20, 1999, the Company's working capital ratio was 0.30 to 1 as
compared to 0.25 to 1 at July 31, 1999. After the sale of BXI Corporation on
January 18, 2000, the liquidity and financial position of the Company improved
significantly. At November 20, 1999, stockholders' equity increased to $777 from
$174 at July 31, 1999 as a result of the Company's net income of $333 in the
first quarter of fiscal 2000 and because of issuance of common stock in
connection with the merger with the corporation that previously operated the
Sacramento brokerage office.
During fiscal 2000, the Company reported net cash provided by operating
activities of $75 as compared to net cash used in operating activities of $(769)
in fiscal 1999. The improvement resulted from the discontinuance of various
business activities not related to the Company's core business, changes in
operating structures resulting in more Company owned and operated brokerage
offices, discontinuance of production and publishing of the Company's barter
industry magazine (alt.finance), and increased use of ITEX Trade Dollars to pay
for goods and services used in the Company's operations.
During fiscal 2000, the Company reported net cash provided by investing
activities of $215 as compared to net cash utilized in investing activities of
$(130) in fiscal 1999. In fiscal 2000, the Company received $118 from initial
payment (after related costs) in connection with the sale of the interest in the
Samana resort property and $100 from the sale of the rights to publish the
Company's barter industry magazine (alt.finance).
During fiscal 2000, the Company reported net cash used in financing activities
of $(120) primarily as a result of the repayment of $150 of bank loans. During
fiscal 1999, the Company reported net cash provided by financing activities of
$1,140 primarily as a result of the completion of a private placement of
convertible notes payable.
Certain financing transactions, the sale of BXI Corporation, and repayment of
various debts of the Company are discussed in the Company's Annual Report on
Form 10-K for the fiscal year ended July 31, 1999. Currently management is
attempting to further improve the cash flows and financial condition of the
Company and the focus of the Company on its primary business of operating trade
exchanges and related activities. However, there can be no assurance that the
Company will be successful in its efforts.
Inflation
Since inflation has been moderate in recent years, inflation has not had a
significant impact on the Company. Inflation is not expected to have a material
future effect.
Inflation may be a factor within the ITEX Retail Trade Exchange. The viability
of the ITEX Retail Trade Exchange is maintained by the confidence that the
members of the exchange have in the strength and stability of the ITEX Trade
Dollar. To maintain such confidence it is necessary that the exchange be
operated in a sound and economic manner. Toward this end, the Company intends
from time to time to take actions to decrease the number of ITEX Trade Dollars
in the exchange by transferring some of its own holdings of trade dollars to the
Exchange.
- 10 -
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
o SEC Inquiry.
-----------
During June 1996, the Company announced in a press release that the Company was
the subject of an informal inquiry from the Securities and Exchange Commission.
Subsequently, the Company received subpoenas for the production of certain
documents pursuant to a formal order of private investigation. In connection
with that investigation, the SEC took the deposition of several individuals. On
September 27, 1999, the SEC filed a civil Complaint in the United States
District Court for the District of Oregon naming the Company and former officers
and/or directors of the Company, Terry L. Neal, Michael T. Baer, Graham H.
Norris, Cynthia Pfaltzgraff and Joseph M. Morris, as defendants and alleging
securities fraud and other securities law violations. In January, 2000, the
Company entered into a Consent and Undertaking with the SEC wherein, without
admitting or denying the allegations of the Complaint, the Company consented to
entry of a Final Judgment of Permanent Injunction which, among other things, (i)
permanently restrains and enjoins the Company from violating Sections 5 and
17(a) of the Securities Act of 1933 and Sections 10(b), 13(a), 13(b)(2)(A) and
13(b)(2)(B) of the Securities Exchange Act of 1934 and Rules 10b-5, 13a-1,
13a-13 and 12b-20 thereunder, and (ii) orders the Company to restate its
financial statements for the fiscal year ended July 31, 1997. The Final Judgment
based upon the Consent was entered by the Court on February 3, 2000. The Company
was given 90 days from that date to file its amended Form 10K for fiscal 1997
and its Form 10K's for 1998 and 1999. The Company complied with this requirement
on May 3, 2000.
o Sondra Ames Litigation.
----------------------
In October 1998, the Company was served with summons and complaint for an action
in the Superior Court of Orange County, California styled Sondra Ames v. ITEX
Corporation, Graham H. Norris and John Does I through X. The complaint alleged
(i) fraud in the acquisition by ITEX of plaintiff's trade exchange in 1996; (ii)
violation of Rule 10b-5 of the Securities and Exchange Act of 1934 in connection
with plaintiff's purchase of ITEX stock on the open market in 1996; (iii) breach
of written and oral contracts, (iv) sex discrimination and harassment; (v)
discrimination based on religion; (vi) retaliation and tortuous discharge; (vii)
defamation; and (viii) violation of various provisions of the California labor
code. Plaintiff asked for $5,000,000 actual damages and for punitive damages
along with other statutory relief. The case was subsequently moved to Federal
Court.
Plaintiff was a former employee and former officer of the Company whose
employment agreement expired in April 1998. The parties settled the matter for
an undisclosed amount, which is confidential by the terms of the agreement, in
January 2000 without any admission of liability and the case has been dismissed
in its entirety. The amount for which the matter was settled was not significant
to the Company's financial position.
- 11 -
o Martin Kagan Litigation.
-----------------------
During July 1998, the Company was served with a summons and complaint for a case
in Circuit Court of Multnomah County, Oregon, styled Martin Kagan v. ITEX
Corporation. The complaint alleges breach of a stock option agreement between
the Company and Kagan and seeks to set aside a settlement agreement between the
parties dated January 14, 1997. The Company has answered the complaint denying
its material allegations. Subsequently, the plaintiff filed a first amended
complaint adding Graham H. Norris, the Company's former President and Chief
Executive Officer, as an additional party and modifying somewhat the allegations
of the original complaint. The Company and Mr. Norris have answered the amended
complaint and denied all allegations. The Company has vigorously defended the
action. Trial before a court appointed referee was held on November 4, 8 and 9,
1999. On April 12, 2000, the referee issued a decision dismissing all of Kagan's
claims except his claim for unlawful sale and purchase of securities. The
referee awarded Kagan $400,000 plus interest from July 14, 1998, plus reasonable
attorneys fees. To be effective, the referee's decision must be confirmed by the
Multnamah County Circuit Court. An unfavorable result is probable; however, the
Company will vigorously pursue this matter an appeal. It is impossible to
predict the outcome of an appeal.
o IBTEX, A.G. Litigation.
----------------------
During September 1998, the Company was served with a summons and complaint for a
case in the Circuit Court of Multnomah County, Oregon, styled IBTEX, A.G. v.
ITEX Corporation, Donovan Snyder and Graham Norris, Sr. The complaint alleges
breach of contract, breach of duty of good faith and fair dealing and violations
of the Oregon Franchise Act. The defendants have answered the complaint denying
its material allegations, demanding that the disputes between IBTEX and the
Company be arbitrated pursuant to an arbitration agreement between the parties
and requiring that the action be stayed until such time as the arbitration is
complete. No arbitration has been set and the case has been dormant for several
months.
o Don Schilz Litigation.
---------------------
During November 1998, a case was filed in the U.S. District Court for the
Northern District of Illinois styled Radio Spirits, Inc. v. Don Schilz and Pride
Communications and Don Schilz v. ITEX Corporation. The case primarily alleges a
common law copyright infringement by the defendants one of whom (Schilz) claims
that the Company is liable for any infringement which is proven.
The plaintiff claims that the defendants have infringed its claimed copyrights
in old time radio programs "The Life of Riley" and "Lone Ranger". Those programs
were part of The Golden Age of Radio, which ITEX formerly owned. The defendants
are a small radio station (Pride Communications) and an individual (Schilz)
whose show has used elements of the Golden Age of Radio. Defendant Schilz
alleges that, if there was an infringement, it is the responsibility of the
Company as it supplied the allegedly infringing material. In January 2000, the
case was settled without any admission of liability on the part of the Company
and without any payment. The third-party complaint was dismissed in its
entirety.
- 12 -
o Wade Cook Financial Corporation Litigation.
--------------------------------------
During February 1998, an action was filed in Washington (Seattle) State Court by
Associated Reciprocal Traders, Ltd., ("ART") an ITEX wholly owned subsidiary,
based on Wade Cook Financial Corporation's ("WCFC") refusal to permit transfer,
without restricted legend, of WCFC stock issued to ART in exchange for a media
due bill. ART filed a Motion for Replevin and Preliminary Injunction requesting
delivery and transfer of the certificates of WCFC stock to ART based upon
compliance by ART with the requirements of Rule 144 of the Securities Act of
1933. After two separate hearings, on October 2, 1998, the Court ruled that the
requirements of Rule 144 had been met, but that issues raised by WCFC concerning
the radio spots, pursuant to the due bill, required a trial of the merits of the
action.
During August 1999, the matter was settled. WCFC has agreed that ART is the
owner of 1,400,000 shares of WCFC unrestricted stock which may be sold by ITEX
at no more than 100,000 shares a month, at current market prices, subject to a
right of first refusal by WCFC. The settlement agreement also provided for the
transfer of 300,000 ITEX trade dollars to WCFC, which the Company has completed.
As of April 28, 2000, the Company had realized approximately $176,000 from the
sale of approximately 451,000 shares of its Wade Cook common stock.
o "John Doe" Litigation.
---------------------
In July 1998, the Company filed an action in Multnomah County, Oregon, State
Court against 100 John Doe defendants, that is, individuals whose identities
were, at the time of filing, unknown to the Company. The Complaint arose from
certain anonymous postings on the Internet which the Company believed
constituted intentional interference with the Company's economic relationships,
unfair trade practices, civil conspiracy and, with respect to then President of
the Company Graham H. Norris, defamation. The Complaint sought monetary damages
and injunctive relief.
After filing the Complaint, the Company subpoened certain Internet Service
Providers to determine the true identity of the anonymous posters. Various
amendments to the Complaint were filed naming certain defendants until the
Company's Fifth Amended Complaint was filed naming Leslie L. French and adding a
claim for breach of a settlement agreement previously entered into between Mr.
French and the Company in connection with other litigation in 1997.
Mr. French has answered the Fifth Amended Complaint essentially denying all of
the allegations of the Complaint and asserting counterclaims against the Company
for (1) breach of contract related to a Settlement Agreement previously entered
into between French and the Company; (2) fraud in the inducement in connection
with the Settlement Agreement; (3) securities fraud; and (4) unlawful trade
practices. The Company denied the allegations of the counterclaims. In April
2000 the parties agreed upon and executed a settlement of the matter, which will
result in the dismissal of the entire action. However, a stipulated final
judgment has not yet been entered. The amount for which the matter was settled
was not significant to the Company's financial position.
o Desert Rose Foods Litigation.
----------------------------
On April 28, 2000, ITEX Corporation was served with summons and complaint for an
action in the Circuit Court of Fairfax County, Virginia style Desert Rose Foods,
Inc. v. ITEX Corporation and ITEX USA, Inc. The complaint alleges Breach of
Contract, Fraud, and violations of federal law. Plaintiff asks for $750,000
compensatory damages, punitive damages, other statutory damages, interest and
attorney's fees.
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Plaintiff alleges that the Company entered into a contract with plaintiff for
delivery of goods valued at approximately $120,000. The Company has
retained local counsel in this case and has denied all of the plaintiff's
allegations. The Company believes Plaintiff's complaint is frivolous and the
Company intends to vigorously defend itself. The Company has successfully
defended similar actions. The Company does not believe this action is
significant to the Company's financial position.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
The Exhibits hereto are listed in the accompanying Exhibit Index.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
ITEX CORPORATION
June 9, 2000 /s/ Collins M Christensen
Date Collins M. Christensen,
Director, President and
Chief Executive Officer
(principal executive officer
and director)
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EXHIBIT INDEX
EXHIBIT DESCRIPTION
27 Financial Data Schedule for the Sixteen
Weeks Ended November 20, 1999